There is great importance in calculating the inventory amount in any company, through which they determine whether they have a surplus or a deficit and thus get an idea of what they will do in times of crisis.
The inventory amount varies according to the company’s activity, and in general, whenever the amount of inventory is excessive or less than normal, this poses a risk to the company’s position.
It can cost it more expenses and losses, and in this article we will talk about all the details about the inventory amount and its importance, and we will also show you how to calculate the amount of inventory at the end of the financial period.
Inventory amount definition
An inventory amount is the number of items a company has from the products it operates with that it can identify by doing the inventory in its own way.
The process of determining the amount of inventory helps to know whether the company suffers from a deficit or surplus in its inventory. And thus determines how it can deal in that case.
Understanding Average Inventory
The term average inventory is an important term related to inventory amount.
Average inventory is an estimate of how much of the same inventory a company has during a period.
Through it, it is possible to address cases of fluctuations in inventory balances, as well as avoiding the results of peak seasons.
Average inventory is also a clear indicator of how stable the inventory is in a company, so it is necessary and related to the amount of inventory.
Average inventory also helps companies understand how quickly they can convert their amount of inventory into actual sales.
How to calculate Inventory amount
There is more than one way to calculate the inventory amount and its value. And in general, calculating the amount of inventory and its value is one of the most important things that benefit the business.
This is because calculating the amount of inventory and its value plays an important role in making decisions in companies. And any errors in its calculation will negatively affect the accounting reports in the new period.
Here are the most important methods for calculating the amount of inventory and knowing its value:
1. FIFO method
It is one of the most popular methods used in calculating the inventory amount and its value.
Through which the calculation is made based on the fact that the inventory that was initially purchased is sold first.
This method is used to calculate the amount of inventory in cases of economic uncertainty.
2. LIFO method
The second most frequently used method of calculating inventory amount and its value is to assume that items purchased last are sold first.
3. Retail method
It is one of the methods used in calculating the inventory amount and its value by which the physical inventory is checked.
In order to use the Retail method in the calculation, you will need some basic metrics, namely:
- Cost of goods available for sale= Beginning inventory + cost of goods.
- Cost-to-retail ratio = Cost ÷ retail price * 100
- Cost of sales = Sales * cost-to-retail ratio
Then you can easily calculate the amount of inventory through the Retail stores method, using the following formula:
- Inventory amount by using Retail method = Cost of goods available for sale – cost of sales.
4. Ending inventory formula
It is one of the simplest and easiest methods used in calculating the amount of inventory, which is done by using the following formula:
- Inventory amount by using ending inventory formula = Beginning inventory + new purchases – cost of goods sold (COGS)